Keeping Families Together: The Role of a Family Constitution

Author

TIGER 21

Published On

November 16, 2012

Published In

Uncategorized

If you are running an enterprise alone or with only one partner, there are no committees or obstacles to prevent you from making decisions or changing direction on the fly. The same is likely true if you are operating an enterprise with your adult children. Your children grew up listening to and watching you, so they understand your values and vision. The lines of communication—at the dinner table and at the office—are open and well-used.

Now, imagine how these lines of communication are stretched when a third generation enters the picture. When your children have children, in-laws join the family and instead of one dinner table, there are several. Individuals seated at each table bring different experiences, beliefs, and value systems, and the makeup of each table continues to change as children grow up, marry, and even divorce. Some family members are genuinely interested in being involved in the family’s enterprise, while others trust other family members to work in their interest without their involvement.

How will you communicate your values and vision to this broader family network? How will you keep family relationships strong? What can you do so that—long after you’ve left the scene—family assets continue to support family members rather than become an anchor that depletes assets or the wedge that drives family members into separate camps?

What is a Family Constitution?

For many multi-generational families, the answer to these questions is a family constitution. A family constitution, although far more limited in scope than the U.S. Constitution, similarly describes the reasons the family exists. It is a written document that explains:

  • The values that the family wants to live by
  • What it means to be a member
  • The family’s Why: its reason for existing as a unit
  • The guidelines within which the family operates
  • The behavior that is expected of family members
  • What the family will and will not do to maintain equality and fairness among all family members

A family constitution is not a legally binding document, but it is a foundational document that family members must come together to modify. In contrast to a shareholder agreement, a family constitution provides clarity and structure to generations of family interactions.

What Happens Without a Family Constitution in Place?

When there is no family constitution in place to communicate a consistent message to all family members, the risk of conflict increases. Instead, family members behave according to their own beliefs and values and can’t know exactly what is expected of them. For example, if Gen 2 announces a family meeting, family members—who are trying to do what they think is expected of them—don’t know if attendance is mandatory or whether they can miss one (or more) meetings.

Without a family constitution in place (as the following example illustrates) family members don’t know how the family uses its resources to support its members.

Here’s one family’s experience: The founders (Gen 1) had two children (Gen 2). These two children and their spouses had seven children (Gen 3). Members of all three generations were owners. Three of the seven members of Gen 3 were actively involved in the family enterprise, and two of them wanted to get MBA degrees. One of the four non-involved members of Gen 3 also wanted an MBA.

  • When the family offered to pay tuition for the family members who were actively involved in the enterprise, the family member who was not active in the business predictably noted, “I’m an owner too, so how is this fair?
  • When another member of Gen 3 wanted to pursue a graduate degree in social work, that owner also asked why the family declined to pay for his degree.
  • If one of the degree-seekers had been a stepchild, would the family pay for an advanced degree?

These are just a few of the questions Gen 1 tackled related to only one issue! Other issues include philanthropy, additional inclusion/exclusion situations, and the family’s decision-making process.

Even families that do not have active businesses in their portfolios benefit from family constitutions because their portfolios operate in many ways like businesses. As wealth grows, people inside and / or outside the family manage how decisions are made and by whom, and choices are made regarding: purchasing and selling various types of investments, tax strategies, lease agreements, distributions, etc. A family constitution provides values-based guidelines for these decisions.

What are the Benefits of Creating a Family Constitution?

Gen 1 owners often foresee that their families could one day benefit from creating a family constitution, but not only do they not really need one, they see them as a layer of bureaucracy and added complication. (Some members of Gen 2 and even Gen 3 may agree.) When Gen 2 becomes active, the benefits of a family constitution become clearer, even though the two generations typically communicate well. When Gen 3 enters the picture, however, the value of the constitution becomes apparent because the fusion of multiple value systems, influences from in-laws and varying levels of interest and involvement in the family enterprise often create conflict, misunderstanding, and mistaken assumptions. By Gen 3, the number of people involved in the enterprise exceeds the number needed to oversee the enterprise. That means some individuals must be excluded from governance if the enterprise is to operate efficiently.

Enjoy the Process of Creating a Family Constitution

When families meet to discuss a family constitution, the benefits can be huge, but so is the complexity of the task. Values and priorities that may have been assumed or unspoken are brought into the light, considered and either validated in the constitution or discarded. Values among generations must be aligned. Discussions typically reveal and address areas of disagreement and misunderstanding.

Family constitutions demonstrate to all family members that they are valued. A constitution conveys to everyone the opportunities that are available and invites—not requires—them to make the most of them.

Candid conversations not only uncover areas of conflict, but they usually bring family members into greater alignment and create rich soil for solid and harmonious relationships. The decisions families make as they create the family constitution describe how the family works, and how it defines fairness and equality.

When is the Time to Create a Family Constitution?

In our experience, families typically decide to create a family constitution to manage the transition of the enterprise from Gen 2 to Gen 3. Installing a constitution to increase the odds of a smooth transition, however, is just one benefit. As Gen 2 transitions the enterprise to Gen 3, family members have the opportunity to practice operating according to the constitution. When Gen 4 shows up, everyone knows how the constitution works. The original intent behind creating the family constitution may have been to manage a transition, but in effect, its creators have provided an enormous service to all future generations.

The optimal time for your family to create a family constitution is before it is needed rather than once a conflict has arisen and emotions run high. Constitutions are not carved in stone and family members may change them to adapt to current events or challenges facing the enterprise. Still, they are a valuable tool that visionary individuals use to establish a foundation for the ongoing success of the family enterprise.

About Elizabeth Ledoux

Elizabeth Ledoux is the founder of The Transition Strategists and serves as a Denver Chair for TIGER 21, the premier peer membership organization for high-net-worth entrepreneurs, investors, and executives. She is a thought leader and speaker on the topics of succession planning, navigating transitions for companies and leaders, family business, strategic growth, and the business journey. Elizabeth is the author of three books for business owners and entrepreneurs including her latest, It’s A Journey – The MUST-HAVE Roadmap to Successful Succession Planning.